Given his “fairly solid track record in predicting Apple‘s (NASDAQ: AAPL) product plans,” according to MacRumors’ Eric Slivka, KGI Securities analyst Ming-Chi Kuo is worth listening to. In a new report, Kuo outlines a detailed product road map for Apple’s new iPad line-up. Though the road map is interesting, it’s the major overhaul for the iPad Mini that steals the spotlight.

iPad Mini. Source: Apple.

A major update for the iPad Mini

Before the end of this year, Apple plans to launch both the iPad 5 and the iPad Mini 2, Kuo claims. An upgrade to a Retina display, as Kuo mentioned, would mark a major improvement — but Apple isn’t stopping there. Kuo believes both iPads will run on the new A7X chip.

With upgrades like this, the iPad Mini 2 would offer consumers a whole new value proposition. Before, the iPad Mini used the A5 chip — also used in the iPad 2 and the iPhone 4S. But an upgrade to the chip that leaps three generations of iPads really sets the tablet apart from its predecessor.

When the iPad Mini first debuted, some criticized it for using a chip that was already previous-generation, presumably to save on costs. If Apple puts in a brand-new A7X with beefier graphics horsepower to drive the Retina display, it will silence the critics.

The pressure

Before 7-inch tablets hit the market, Apple’s 9.7-inch iPad was considered the standard size for tablets. Those days, however, are long gone.

Apple responded to 7-inch tablets with the 7.9-inch iPad Mini. IDC estimates that in 2013, sub-8-inch tablets will make up 55% of tablets sold worldwide.

Meanwhile, Apple’s only product in this category lacks both the Retina display and faster chips of its larger counterpart. Both Google and Amazon boast sub-8-inch tablets with HD displays. The iPad Mini is quickly falling behind and the company is feeling the pressure.

Apple’s pressure from competition is especially evident in Kuo’s comments regarding the company’s decision to accelerate the roadmap for the iPad Mini with a retina display.

But we now believe that iPad mini 2 may be pulled in for launching in late 2013. Since other brand vendors are all expected to have a line-up of new high resolution 7-8? tablets to launch over the next 3-6 months, we think iPad mini 2 may lose its opportunity in the market if it is slated for introduction next year. Despite minimal form factor differentiation and unchanged casing colors, we think the retina display will still boost iPad mini 2's attractiveness. Although the model’s availability is small due to production issues, if iPad mini 2 gets an introduction and launch this year, it should be able to impact consumers and freeze their budget for other brand vendors’ tablets.

There had been prior reports that Apple was potentially facing delays on the Retina iPad Mini, and investors can rest easier now that the device appears slated for a 2013 launch.

Profit margins?

There’s no arguing Apple’s decision to offer a competitive offering — it has to. Seven-inch tablets are a huge market, and it’s only expected to grow between now and 2017. But is the need for an accelerated road map evidence that Apple may continue to suffer further declines in gross profit margins? In October 2012, Apple CEO Tim Cook said that the iPad Mini had gross profit margins meaningfully below its corporate average. With major updates like this, will margins be pressured even further?

In particular, a tablet’s display typically comprises approximately 40% of the component bill-of-materials, so adding a Retina display may pressure margins. On the other hand, Apple should be progressing down the cost curve with the iPad Mini since no major external redesigns are expected.

Or, will Apple introduce two pricing levels — like they have with the Macbook Pro line (one level for MacBook Pros with Retina display, and one for those without)?

Either way, the verdict is clear: Competition is heated and an aggressive response is needed to fend off rivals in the small-tablet segment.

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